Crafting a Forward Looking Investment Portfolio

Transcription

1 BOURSE SECURITIES LIMITED February 15th, 2016 Crafting a Forward Looking Investment Portfolio This week, we at Bourse evaluate the investment considerations and opportunities having looked previously at three main investor risk profiles and their respective portfolios, namely the Moderate, Conservative and Aggressive. We put forward our recommendations to investors on the main elements of arranging their portfolios in order to achieve positive returns. A reminder of the three investor profiles The Moderate Investor: This investor is prepared to generate moderate returns with a reasonable level of risk, focusing on a balance of wealth generation through both capital appreciation and income generation. The Conservative Investor: This investor s main investment objective is preservation of capital and generation of income, with limited focus on capital appreciation. The Aggressive Investor: This investor is willing to take a higher level of risk. This investor class places more emphasis on capital appreciation, with the willingness to take concentrated portfolio positions to achieve this objective. Portfolio Performance In assessing the performance of the various portfolios, you would note that certain portfolios would have outperformed in different years. For instance, the Aggressive

2 portfolio would have outperformed both the Conservative and Moderate in periods of higher equity returns such as 2010 and Conversely, the Aggressive portfolio would have retreated in periods of lower equity returns such as 2011, 2014 and 2015, when the Moderate and Conservative portfolios would have outperformed. This disparity would have been attributable to the varying asset allocations of the different portfolios. Each of the three portfolios would have yielded total returns to investors in excess of 30% over the six year period from 2010 to 2015 inclusive, with every year achieving positive returns with the exception of However, if you had not invested and simply kept your money in the bank, you would have earned less than 1.5% over the six year period as deposit rates ranged from 0.20% to 0.36% between 2010 and With an investable value of TT$100,000 equivalent in 2010, the choice of whether or not to invest would have meant have a difference of having $101,500 or $130,000 (with all else remaining constant) in 2015.

3 Lessons Learned 1. Broaden your horizons Consistent with Bourse s themes for 2016, it is important for investors to diversify their portfolio by currency. Diversification not only gives the local investor the opportunity to invest beyond our borders but it can also reduce overall investment risk. Coupled with this, investors holding US dollars are better of investing in USD denominated assets as they earn a higher level of inflation adjusted returns when compared to TTD denominated assets. When compared to the average 2015 TT inflation rate (4.86%), investors purchasing 10 year (10Y) TTD bonds would have earned 3.96% in nominal returns but -0.90% in inflation adjusted returns. In comparison, investors purchasing 10Y USD bonds would have earned 3.89% in nominal returns and 2.56% in inflation adjusted returns when compared to the US inflation rate (1.33%).

4 2. You cannot really time the market Investing is both a process and a discipline, with success most often achieved over longer periods of time and not usually overnight. Often is the case that individual investors enter the market when it is nearing its peak or flattening out due to bad market timing. Timing the markets as to when to buy or sell portions of your portfolio is a notoriously difficult and often perilous investment practice. This is where investing discipline, patience and a longer-term approach to investing may yield better results for you. 3. Do not put all of your eggs in one basket Asset allocation is one of the most important components of investing. When deliberating on how to arrange your investment portfolio, it is imperative that you evaluate a wide range of factors and how they apply to your own needs and refrain from making hasty or popular investment decisions. Careful consideration should always be given to five main factors; your investment objectives, investing time horizon, tolerance for risk, personal investment experience and overall financial situation.

5 Staying informed is a critical ingredient to investment success. While you may not become an expert on all facets of investing, you can help improve your decision making for your portfolio by keeping abreast of market news and developments. There are many readily available sources of news and investment idea websites which may provide insight into potential opportunities for you to benefit from. At the very least, staying informed can help you have a more useful conversation with your financial services provider to make better decisions as you grow your wealth. Challenges Locally, individual investors generally face four (2) main challenges in constructing a suitable portfolio viz. access to USD; managing risk; hedging against inflation; and selecting and allocating assets

6 Allocation and time horizon Selecting the right mix of assets for your portfolio may be a daunting task for an individual investor in what may seem to be an unlimited investment universe. Adding currency risk and appropriate bond and stock selection to the mix, can prove to be especially challenging. In addition, determining whether to invest in the short, medium or long-term can be difficult for some investors. A more effective approach would be to consult an established investment firm, such as Bourse, who will be willing to assist you with investment advice, portfolio management and brokerage. Accessing hard currency A drawback to building a diversified portfolio is the matter of access to hard currency. For those who have already built up savings in US dollars, as the international markets trend downwards, good opportunities for entry would arise. Portfolio Considerations With the current decline in equity market across the globe, investors may consider lower risk and more stable investments. Equities may present a good buying opportunity once global economic fundamentals appear more optimistic. At this time, however, international equity markets are facing significant volatility due to lower commodity prices, global growth concerns and uncertainty surrounding US monetary policy measures. Local equities are expected to be impacted by the effects of lower oil prices on local companies and the prospect of currency depreciation. Considering money market funds and other fixed income investments such as bonds makes good economic sense at this time. Money market funds, while offering lower returns than bonds, give investors the benefit of higher liquidity and lower risk which are attractive features during challenging economic periods. As mentioned in our previous articles, in selecting a money market fund, investors should compare the yield or rate of interest that can be earned on the investment, the

7 credibility or the provider and investment expertise and experience in the management of funds. We continue to stress that fixed income instruments provide investors with steady semiannual interest payments in addition to repayment of principal upon maturity. This hold to maturity approach insulates investors from daily market fluctuations that affect bond prices, even though they are typically less volatile than equity prices. The type and quantity of fixed income instruments included in a portfolio will vary according to investor profile. At one end of the spectrum, conservative investors, seeking mainly preservation of capital, will hold the largest portion of fixed income instruments whereas aggressive investors hold a more significant portion of their portfolio in equities. For all investor profiles, USD denominated bonds should comprise a greater portion of the fixed income component when compared to TTD denominated bonds. Given that local interest rates have been trending upwards, bond valuations may continue to decline going forward. This trend in increasing interest rates could also be further exacerbated by the large issuance of debt expected as the Government of Trinidad & Tobago seeks to finance the budget deficit. Furthermore, should there be continued depreciation in the TTD currency or a spike in inflation, investors will struggle to earn a positive real rate of return. Investors with access to hard currency can maximize their investment returns by allocating a greater portion of their portfolio to USD denominated bonds. Investment grade US$ denominated with a 5-7 year maturity offer an attractive risk/return trade off as well as positive inflation adjusted returns. Investors should also pay close attention to credit quality and company profile. In doing so, consulting an experienced and independent investment adviser, such as Bourse, is a useful step.

8 For the detailed report and access to our previous articles, visit: For more information on these and other investment themes, please contact Bourse Securities Limited, at or us at This document has been prepared by Bourse Securities Limited, ( Bourse ), for information purposes only. The production of this publication is not to in any way establish an offer or solicit for the subscription, purchase or sale of any of the securities stated herein to US persons or to contradict any laws of jurisdictions which would interpret our research to be an offer. Any trade in securities recommended herein is done subject to the fact that Bourse, its subsidiaries and/or affiliates have or may have specific or potential conflicts of interest in respect of the security or the issuer of the security, including those arising from (i) trading or dealing in certain securities and acting as an investment advisor; (ii) holding of securities of the issuer as beneficial owner; (iii) having benefitted, benefitting or to benefit from compensation arrangements; (iv) acting as underwriter in any distribution of securities of the issuer in the three years immediately preceding this document; or (v) having direct or indirect financial or other interest in the security or the issuer of the security. Investors are advised accordingly. Neither Bourse nor any of its subsidiaries, affiliates directors, officers, employees, representatives or agents, accepts any liability whatsoever for any direct, indirect or consequential losses arising from the use of this document or its contents or reliance on the information contained herein. Bourse does not guarantee the accuracy or completeness of the information in this document, which may have been obtained from or is based upon trade and statistical services or other third party sources. The information in this document is not intended to predict actual results and no assurances are given with respect thereto.

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